Unfortunately he doesn’t appear to have a clue what causes them.
Here is what the president said in his August 10 radio address: “We have to turn the page on the bubble-and-bust mentality that created this mess.” A day earlier, at a White House press conference, he told us that he wanted a Fed chairman who “makes sure that we’re not seeing artificial bubbles.”
Is this blowing smoke, as when the president said in his first budget message that he wanted to take the country from “an era of borrow and spend to an era of save and invest,” just before embarking on the biggest deficit spending spree in history? Or was the president signaling a genuine worry about bubbles? If so, the problem is that in order to avoid bubbles you have to understand what causes them.
The Bloomberg article explains that: “Republicans and firms such as Pacific Investment Management Co., manager of the world’s largest bond fund, have criticized the Fed for fueling potential bubbles with easy credit and through its asset-buying program known as quantitative easing [all of which create large sums of new money out of thin air]. Obama doesn’t share that criticism, saying in June that Bernanke has done ‘an outstanding job.’ The president sees bubbles arising from other causes. Chief among them: an increasingly skewed distribution of income. ‘When wealth concentrates at the very top, it can inflate unstable bubbles that threaten the economy,’ the president said in a July 24 speech. [ He added]… in a July 30 speech in Chattanooga… [that] narrowing the rich-poor gap is ‘my highest priority.'”
This is confusing cause and effect. People becoming enormously wealthy while the economy does poorly is an effect, not a cause, an effect brought about by reckless Fed money printing. Obama must surely know that Wall Street firms are the first recipients of the new money created by the Fed. They speculate with it or use it as collateral for derivatives or take their cut on it as it flows further out into the economy. Other people take advantage of government connections and government funds that are also available because of Fed financing. Today the Fed is the chief creditor of the Federal Government, even bigger than China and Japan. Since the Fed is part of the government, the government is really buying bonds from itself with newly created money, and government cronies are major beneficiaries of this. If the president really wants less economic inequality, he should stop financing the crony capitalism.
The Bloomberg article continues: “‘[Bubbles are] … a legitimate concern from an economic perspective,’ says Roberto Perli, a partner in Cornerstone Macro, a Washington economic-research firm, and a former Fed official. ‘But I don’t think [the president’s remarks are] motivated by consideration of imminent risk.’ … Perli [adds that] both [leading] candidates [for Fed chairman, Lawrence Summers and Janet Yellen] can claim bubble-battling expertise.” This is complete nonsense, since Fed money printing is the primary cause of bubbles, and both Summers and Yellen have strongly endorsed it.
Will the Fed’s unrestrained money printing fuel more bubbles? It is doing so at this very moment. The article quotes Mohamed El-Erian, Pimco’s co-chief executive officer: “We see artificial pricing in virtually every asset class.”